Circular No. 03/2018 on Capital Adequacy and Leverage Ratios for Credit Institutions

BANQUE DE LA REPUBLIQUE DU BURUNDI

LE GOUVERNEUR

CIRCULAIRE N° 03/2018 ON CAPITAL ADEQUACY AND LEVERAGE RATIOS FOR CREDIT INSTITUTIONS ISSUED PURSUANT TO LAW N° 1/17 OF 22 AUGUST 2017 GOVERNING BANKING ACTIVITIES

Having regard to Law N° 1/34 of 02 December 2008 on the Statutes of the Bank of the Republic of Burundi, particularly Articles 7 (paragraphs 4 and 6) and 8;

Having regard to Law N° 1/17 of 22 August 2017 governing banking activities, particularly Articles 3, 48, 49, 50, 51, 52 and 63;

Having regard to Circular N° 02/2018 on the own funds of credit institutions;

Having regard to Circular N° 12/2018 on risk classification and the establishment of provisions by credit institutions;

Having reviewed Circular N° 03/2014 on the solvency ratios of credit institutions;

The Bank of the Republic of Burundi, hereinafter referred to as the "Central Bank",

HEREBY ENACTS:

CHAPTER I: GENERAL PROVISIONS

Article 1: Purpose

The purpose of this Circular is to establish the minimum solvency standards for a credit institution, taking into account the level of own funds relative to the coverage of credit, market, and operational risks. It also establishes the minimum leverage ratio standard as well as the conservation, countercyclical, and systemic buffers.

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Article 2: Definitions

For the purposes of this Circular, the following terms are defined as:

• systemically important credit institution: a credit institution whose failure could trigger serious chain reactions on the banking system and the economy in general;

• small enterprise: any legal entity with neither an annual turnover exceeding one hundred million BIF, nor total deposits exceeding one hundred million BIF, nor total credits exceeding one hundred million BIF;

• conservation buffer: additional reserve of core Tier 1 own funds intended to cover losses during periods of financial and economic stress;

• countercyclical buffer: additional reserve of core own funds aimed at protecting the banking sector against the accumulation of systemic risk during an economic recovery when the general growth of credits tends to be excessive;

• systemic risk buffer: surcharge of core own funds as a percentage of risk-weighted assets, required for every systemically important credit institution and aimed at protecting the credit institution against failure.

CHAPTER II: MINIMUM REQUIREMENTS FOR SOLVENCY AND LEVERAGE RATIOS

Article 3: Minimum Solvency Ratio Standards

The credit institution is required to comply at all times with:

• a core Tier 1 solvency ratio of at least 8.5%, determined by the ratio between the amount of core Tier 1 own funds and the total of risk-weighted assets for credit, market, and operational risk;

• a Tier 1 solvency ratio of at least 10%, determined by the ratio between the amount of net Tier 1 own funds and the total of risk-weighted assets for credit, market, and operational risk;

• a total solvency ratio of at least 12%, determined by the ratio between the amount of net total own funds and the total of risk-weighted assets for credit, market, and operational risk.

In addition to these minimum standards for basic and total solvency ratios, the credit institution is required to establish a conservation buffer of core

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tier 1 own funds of 2.5% of the total risk-weighted assets for credit, market and operational risk.

By adding the conservation buffer to the minimum standards for basic and total solvency ratios, the credit institution is required to comply at all times with:

• a core Tier 1 solvency ratio of 11%;
• a Tier 1 solvency ratio of 12.5%;
• a total solvency ratio of 14.5%.

Article 4: Calculation of Solvency Ratios

The numerators of the ratios indicated in Article 3 of this Circular are respectively the core Tier 1 own funds, the net Tier 1 own funds and the net total own funds, calculated in accordance with the provisions of the Circular N° 02/2018 on the own funds of credit institutions.

The denominator of the ratios indicated in Article 3 of this Circular is constituted by the total of risk-weighted assets for credit, market, and operational risk.

The risk-weighted assets for credit and market risk are determined according to the standard method, while those for operational risk are calculated according to the basic indicator method, as provided for in Articles 6 to 12.

Article 5: Minimum Leverage Ratio Standard

The credit institution must comply at all times with a minimum leverage ratio of 5%, determined by the ratio between the amount of net Tier 1 own funds as calculated under Circular N° 02/2018 and the total of on-balance sheet assets and given off-balance sheet commitments.

The given off-balance sheet commitments are taken into account after the following weightings:

a. 0% for guarantees and sureties given in favor of the Public Administration;

b. 20% for:

• financing commitments given in favor of credit institutions and similar entities;
• credit guarantees given in favor of credit institutions and similar entities;
• documentary credits secured by underlying goods (net of related provisions);

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• other commitments, sureties and guarantees in favor of credit institutions and similar entities;

c. 50% for:

• performance guarantees;
• bid bonds;

d. 100% for:

• financing commitments given in favor of customers (net of provisions and security deposits);
• credit guarantees given in favor of customers;
• other sureties and guarantees given in favor of customers;
• compromised signature commitments net of related provisions.

CHAPTER III: DETERMINATION OF RISK-WEIGHTED ASSETS

Section 1: Risk-Weighted Assets for Credit Risk

Article 6: Determination of Risk-Weighted Assets for Credit Risk

Risk-weighted assets for credit risk are determined by the asset elements of the balance sheet and given off-balance sheet commitments net of amortization, related provisions, and eligible guarantees provided for in Articles 7 and 8, and assigned weighting rates, in accordance with the provisions of Article 9 of this Circular.

Article 7: Deductible Guarantees

The eligible guarantees for deductions in the determination of risk-weighted assets for credit risk are as follows:

• guarantees received from the Public Treasury;
• guarantees received from international organizations or international financial institutions up to 80%, with the approval of the Central Bank;
• pledge of securities issued or guaranteed by the Public Treasury;
• pledges of cash (security deposits);
• pledge of treasury bills or debt securities issued by Burundian credit institutions up to 80%;
• pledge of time accounts opened with the credit institution itself or of negotiable debt securities issued by it;
• guarantees presented in the context of commitments arising from the money market;
• surety of a top-tier international bank other than the parent company or

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affiliate, unless exempted by the Central Bank.

Article 8: Characteristics of Deductible Guarantees

To be deductible, the guarantees provided for in the previous article must:

• be formalized in writing, established and registered in compliance with the legal and regulatory provisions in force;
• be callable on first demand and without possibility of contestation;
• have a maturity at least equal to that of the covered credit.

Guarantees can only be deducted up to their value and the amount of the covered asset.

Article 9: Applicable Weighting Rates for Balance Sheet and Off-Balance Sheet Elements

The balance sheet and off-balance sheet elements considered for the calculation of credit risk, as well as the weighting rates applied to them, are detailed below:

a) Weighting rate of zero percent (0%)

• Cash holdings;
• Holdings at the Central Bank;
• Postal Checking Accounts (CCP);
• Claims on the State (Treasury bills and others);
• Negotiable securities issued or guaranteed by foreign States and public administrations rated AAA to AA-;
• Negotiable securities issued or guaranteed by foreign central banks and financial institutions rated AAA to AA-;
• Off-balance sheet: Guarantees and sureties given in favor of the Public Administration.

b) Weighting rate of twenty percent (20%)

• Holdings and claims on credit institutions located in Burundi, except for claims in the form of subordinated debt;
• Holdings and claims on microfinance institutions located in Burundi, except for claims in the form of subordinated debt;
• Holdings at a foreign correspondent rated AAA to AA-;

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• Negotiable securities issued or guaranteed by foreign States and public administrations rated A+ to A-;
• Negotiable securities issued or guaranteed by foreign central banks and financial institutions rated A+ to A-;
• Receivables (credit institutions and similar entities);
• Operations with headquarters and subsidiaries abroad;
• Securities received in repurchase agreements, loans, and other debtor accounts;
• Off-balance sheet:
  • financing commitments given in favor of credit institutions and similar entities;
  • credit guarantees given in favor of credit institutions and similar entities;
  • documentary credits secured by underlying goods net of related provisions;
  • other commitments, sureties and guarantees given in favor of credit institutions and similar entities.

c) Weighting rate of fifty percent (50%)

• Holdings at a foreign correspondent rated A+ to BBB-;
• Financial leasing contracts;
• Negotiable securities issued or guaranteed by foreign States and public administrations rated BBB+ to BBB-;
• Negotiable securities issued or guaranteed by foreign central banks and financial institutions rated BBB+ to BBB-;
• Off-balance sheet:
  • performance guarantees;
  • bid bonds.

d) Weighting rate of seventy-five percent (75%)

• Claims on small enterprises provided they do not have arrears of 90 days or more.

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e) Weighting rate of one hundred percent (100%)

• Holdings at a foreign correspondent rated BB+ to B-;
• Holdings at any foreign correspondent rated but whose updated rating over the last three months has not been transmitted to the Central Bank by the credit institution;
• Holdings at a foreign correspondent with no rating;
• Claims on customers net of their provisions and related guarantees meeting the criteria provided for in Articles 7 and 8 of this Circular, excluding credits intended for small enterprises not having arrears of 90 days or more;
• Receivables;
• Financial investments, except for securities issued by the State;
• Various debtors, except for sums due by the State in local currency;
• Asset regularization accounts;
• Miscellaneous values and uses;
• Net fixed assets;
• Impaired claims net (credit institutions and similar entities) if provisions are greater than or equal to 20%;
• Off-balance sheet:
  • financing commitments given in favor of customers (net of provisions and security deposits);
  • credit guarantees given in favor of customers;
  • other sureties and guarantees given in favor of customers;
  • compromised signature commitments net of related provisions;

f) Weighting rate of one hundred fifty percent (150%)

• Holdings at a foreign correspondent with an external rating lower than B-;
• Impaired claims net (credit institutions and similar entities) if provisions are less than 20%.

Article 10: Cases of Non-Compliance with Credit Risk Weighting Criteria

The Central Bank may oppose the application of a given weighting to an asset or off-balance sheet element if it considers that the required weighting criteria are not met.

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Section 2: Risk-Weighted Assets for Market Risk

Article 11: Determination of Risk-Weighted Assets for Market Risk

Risk-weighted assets for exchange risk are determined according to the standard method by following the steps below, reproduced in Table 1 in Annex 1, taking into account balance sheet and off-balance sheet elements:

a. calculate the net foreign exchange position in US Dollars, Euros, and other currencies;

b. sum the net short positions, on the one hand, and the net long positions, on the other hand, for each currency, retaining the highest amount in absolute value;

c. the overall net foreign exchange position is equal to the highest amount in absolute value found in point b;

d. calculate the capital requirement to cover exchange risk: 12% of the overall net foreign exchange position found in point c;

e. calculate the amount of market risk to be placed in the denominator of the solvency ratio: 8.33 multiplied by the amount related to the capital requirement found in point d, the multiplier being determined by the simple rule of three starting from the following formula: the quotient of own funds by risk-weighted assets must be equal to 12%.

Section 3: Risk-Weighted Assets for Operational Risk

Article 12: Determination of Risk-Weighted Assets for Operational Risk

Operational risk is determined according to the basic indicator approach by following the steps below, also reproduced in Table 1 in Annex 1:

a. calculate the average GBI (Gross Income) over the last three years (zero and negative GBIs are not taken into account in the calculation);

b. calculate the capital requirement: 15% of the average GBI found in point a;

c. calculate the weighted operational risk amount: 8.33 multiplied by the amount related to the capital requirement found in point b, the multiplier being found from the formula provided in Article 11, point e of this Circular.

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CHAPTER IV: COUNTERCYCLICAL BUFFER AND SYSTEMIC RISK BUFFER

Article 13: Requirement to Establish a Countercyclical Buffer

The Central Bank may require credit institutions to establish a countercyclical buffer of core own funds varying from 0 to 2.5% of total risk-weighted assets, taking into account national conjunctural conditions, particularly the evolution of credits. The countercyclical buffer is added to the conservation buffer of core own funds.

The Central Bank determines the implementation modalities of the countercyclical buffer.

Article 14: Systemic Risk Buffer

In addition to the minimum solvency ratio requirements, the Central Bank may require a systemically important credit institution to establish a systemic risk buffer.

The Central Bank determines the implementation modalities of the systemic risk buffer based on the systemic importance of the credit institution.

CHAPTER V: FINAL PROVISIONS

Article 15: Additional Solvency Ratio Requirements

The Central Bank may require higher minimum solvency ratios for a given credit institution based on one or more criteria. These include notably the following criteria:

• the credit institution has incurred or may suffer losses resulting in a significant decrease in own funds;
• the credit institution has significant commitments exposing it to risk, namely credit, market, interest rate, liquidity, and operational risk;
• the credit institution has a particularly large volume of poor-quality assets;
• the credit institution is experiencing rapid growth in its activity;
• the credit institution is adversely affected by the activities or situation of its parent company, associated companies, or subsidiaries;
• the credit institution has a high governance risk.

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Article 16: Declaration to the Central Bank

The credit institution must calculate and transmit its solvency and leverage ratios to the Central Bank at the end of each month according to the models in Annexes 1 and 2.

The credit institution, having holdings with foreign correspondents, must also transmit to the Central Bank, at the end of each month, their external ratings for adequate weighting in the calculation of solvency ratios.

Article 17: Publication of Solvency Ratios by the Credit Institution

The credit institution is required to publish quarterly, on its website and in the Official Bulletin of Burundi (BOB), the core Tier 1 solvency ratio, the basic solvency ratio, the total solvency ratio, as well as the leverage ratio.

Article 18: Entry into Force

This Circular replaces Circular N° 03/2014 of 03/09/2014 on the solvency ratios of credit institutions and enters into force on the day of its publication on the website of the Central Bank and in the Official Bulletin of Burundi.

Done in Bujumbura, on 17/08/2018

Jean CIZA Governor.- BANQUE de la REPUBLIQUE BRB GOUVERNEUR du BURUNDI

1, Avenue du Gouvernement- B.P. 705 BUJUMBURA - Tel : (257) 22-20 40 00 / 22 22 27 44- Fax : (257) 223128 - Courriel brb@brb.bi

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Annex 1 to Circular N° 03/2018

Establishment: Credit Ratios: Document: Solvency Ratios Period:

Amount in thousands of BIF

Label	Gross Amounts (1)	Eligible Guarantees (2)	Net Amounts (3) = (1)-(2)	Weighting % (4)	Weighted Risks (3)x(4)
I. Balance Sheet Elements
a. Elements weighted at 0%
- Cash holdings				0%
- Holdings at the Central Bank				0%
- Claims on the State (Treasury bills and others)				0%
- Postal Checking Accounts (CCP)				0%
- Negotiable securities issued or guaranteed by foreign States and public administrations rated AAA to AA-				0%
- Negotiable securities issued or guaranteed by foreign central banks and financial institutions rated AAA to AA-				0%
b. Elements weighted at 20%
- Holdings and claims on credit institutions located in Burundi, except for claims in the form of subordinated debt				20%
- Holdings and claims on microfinance institutions located in Burundi, except for claims in the form of subordinated debt				20%
- Holdings at a foreign correspondent rated AAA to AA-				20%
- Negotiable securities issued or guaranteed by foreign States and public administrations rated A+ to A-				20%
Total a

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Label	Gross Amounts (1)	Eligible Guarantees (2)	Net Amounts (3) = (1)-(2)	Weighting % (4)	Weighted Risks (3)x(4)
c. Elements weighted at 50%
- Holdings at a foreign correspondent rated A+ to BBB-				50%
- Financial leasing contracts				50%
- Negotiable securities issued or guaranteed by foreign States and public administrations rated BBB+ to BBB-				50%
- Negotiable securities issued or guaranteed by foreign central banks and financial institutions rated BBB+ to BBB-				50%
- Off-balance sheet: performance guarantees				50%
- Off-balance sheet: bid bonds				50%
Total b
d. Element weighted at 75%
- Claims on small enterprises provided they do not have arrears of 90 days or more				75%
Total c
e. Elements weighted at 100%
- Holdings at a foreign correspondent rated BB+ to B-				100%
- Holdings at any foreign correspondent rated but whose updated rating over the last three months has not been transmitted to the Central Bank by the credit institution				100%
- Holdings at a foreign correspondent with no rating				100%
- Claims on customers net of their provisions and related guarantees, excluding credits intended for small enterprises not having arrears of 90 days or more				100%
- Receivables				100%
- Financial investments, except for securities issued by the State				100%
- Various debtors, except for sums due by the State in local currency				100%
- Asset regularization accounts				100%
- Miscellaneous values and uses				100%

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Label	Gross Amounts (1)	Eligible Guarantees (2)	Net Amounts (3) = (1)-(2)	Weighting % (4)	Weighted Risks (3)x(4)
f. Elements weighted at 150%
- Holdings at a foreign correspondent with an external rating lower than B-				150%
- Impaired claims net (credit institutions and similar entities) if provisions are less than 20%				150%
Total e
II. Off-Balance Sheet Elements
- Guarantees and sureties given in favor of the Public Administration				0%
- Financing commitments given in favor of credit institutions and similar entities				20%
- Credit guarantees given in favor of credit institutions and similar entities				20%
- Documentary credits secured by underlying goods net of related provisions				20%
- Other commitments, sureties and guarantees in favor of credit institutions and similar entities				20%
- Performance guarantees				50%
- Bid bonds				50%
- Financing commitments given in favor of customers (net of provisions and security deposits)				100%
- Credit guarantees given in favor of customers				100%
- Other sureties and guarantees given in favor of customers				100%
- Compromised signature commitments net of related provisions.				100%
Total f
Total I (total of balance sheet elements = a+b+c+d+e+f)
Total II (total of off-balance sheet elements)
X = TOTAL OF RISK-WEIGHTED ASSETS FOR CREDIT RISK (Total I+Total II)

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CURRENCIES (Balance Sheet and Off-Balance Sheet; at average Central Bank rate

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